Fed Stands Pat On Rates, Leaves Room For December Hike

The Federal Reserve left interest rates unchanged at the close of its two-day meeting on Wednesday, but struck an upbeat tone on the economy and left room for one additional rate hike before the year is over.

At the conclusion of the Federal Open Market Committee meeting, policymakers unanimously voted to keep the benchmark rate between 1% to 1.25%. The decision, which was widely anticipated by investors, comes on the eve of a leadership change. President Trump plans to announce a new pick for Fed chair on Thursday.

The Fed said the labor market has continued to strengthen and economic activity has picked up despite the devastation brought by the string of hurricanes. The economy grew at a brisk 3% in the third quarter, according to the latest government reading.

Stocks rose slightly after the news on Wednesday afternoon, with the S&P 500 adding 0.2%.

The central bank still left a December rate hike on the table, which would be its third and final rate hike in 2017. The futures market has priced in a 97% likelihood that the Fed will move the needle on rates next month, according to the CME Group's FedWatch tool.

The Fed reiterated that it will continue to monitor inflation, which has remained stubbornly below the Fed's 2% target. Fed chairwoman Janet Yellen and several other policymakers have expressed concern with low inflation.

“Where each policymaker comes down on what to make of low inflation matters in terms of guiding their appetite for further hikes," wrote Morgan Stanley analyst Ellen Zentner in a note to clients. She added that she doesn't see the Fed postponing a December rate hike.

"I don't think they're going to allow noise from the storms to sway their decisions," said Matt Freund, co-chief investment officer and head of fixed income strategies at Calamos Investments.

The Federal Reserve has also began the process of unwinding its $4.5 trillion financial crisis-era balance sheet last month in a sign that it's pleased with the improving state of the economy. The central bank had scooped up trillions of dollars in government bonds, mortgage-backed securities and other assets in the wake of the financial crisis.

The plan is to slowly stop reinvesting the money that its portfolio throws off. It will start by allowing $6 billion in Treasury securities and $4 billion in mortgage-backed securities to mature every month. Eventually, that cap will climb to $30 billion in Treasury's a month and $20 billion in mortgage securities.

Meanwhile, the makeup of the Fed could soon change in a big way. President Donald Trump is reportedly eyeing Jerome Powell as the next Fed chair. Powell is a former investment banker who currently sits on the board of governors at the Fed and has worked closely with Yellen for years.

Yellen will not hold a press conference to discuss the Fed's decision today.